ELSS (Equity Linked Savings Scheme) and PPF (Public Provident Fund) both are saving schemes eligible for tax benefits.
Equity Linked Saving Scheme (ELSS) is a type of mutual fund that is eligible for tax deduction benefits under the section of 80C of the Income Tax Act, 1961. Due to higher returns and lowest lock-in period of 3 years in the tax saving category, ELSS is quite popular. ELSS funds generate returns by primarily investing in equity and equity-related instruments. This also makes it a suitable investment option for a person with long term goals.
Public Provident Fund (PPF) is a government-backed savings scheme which provides guaranteed returns and added tax benefits u/s 80C. The interest rates on PPF are fixed by the government every quarter. The interest rates for the current quarter Q 3 (October-December), FY-19 has been fixed at 7.9%.
- High Returns: ELSS schemes have generated about 11-14% returns in 3-years and 5 years time frame. However, ELSS returns are market-linked not guaranteed.
- Tax Benefits u/s 80C: Investments up to Rs.1,50,000 a year in ELSS are eligible for tax deduction benefits under section 80C of the Income Tax Act, 1961. One can avail tax benefits of up to Rs. 46,800 by investing in ELSS. However, unlike PPF which is tax-free at every stage, ELSS returns are taxable at 10% if the gain exceeds Rs. 1,00,000 in the year.
- Lowest Lock-in: ELSS investment comes with a lock-in of only 3 years in the tax-saving category, making ELSS investments a relatively more liquid option. One can redeem the ELSS fund investment in just 3 years.
- SIP Option: The minimum investment is as low as Rs. 500 per month through the Systematic Investment Plan (SIP). One can start and stop the SIP when convenient. Thus it provides flexibility as well as convenience while making small but regular investments.
- Low-Risk Instrument: It is the safest investment options available in the country.
Despite being low on returns, PPF has been an immensely popular investment option due to the safety of capital and returns.
- Lock-in Period: PPF deposits come with the mandatory lock-in period of 15 years. One can take a loan on the PPF deposits from 3rd to 6th financial year from the year of account opening.
- Tax Benefits: PPF investments come under exempt-exempt-exempt (EEE) category i.e at no stage are PPF deposits or returns taxed. For PPF deposits of up to Rs 1,50,000 the investor can avail tax benefits under section 80C of the Income Tax Act. Interest credited every month is tax-free, too. The maturity amount is also tax-exempt.
- Fixed Returns: PPF deposits fixed returns in form of interest rate every year. The interest rate is fixed by the government on a quarterly basis and the average returns on PPF for the last 5 years have been around 8%.
- Investment and Withdrawal: PPF has a minimum investment of Rs 500 and a maximum investment of Rs 150000. Deposits can be made in the PPF account up to 12 times in a year. Premature closure is only allowed on limited grounds such as serious ailments. Partial withdrawals are allowed after the expiry of 5 years since the end of the year in which the account is opened.
Difference between PPF vs ELSS
PPF investment is low risk because it is backed by the Government of India and hence a better investment option for highly risk-averse investors.
ELSS funds, on the other hand, invest in equity and equity-related instruments and are exposed to market risks, which makes them a better investment option for those who are willing to take the risk volatility for the sake of long term gains.
The rate of interest on PPF investment is decided by the Government of India with the present rate being 7.9%.
The returns on ELSS depend on market movements, the 3-year annualized historical returns on ELSS funds being 12% and above.
3. Tax on Returns
The returns on PPF investments are totally tax-free.
In ELSS, gains of over Rs 1,00,000 are considered as long term capital gains and are, therefore, taxed at the rate of 10%.
4. Lock-in Period
PPF investment has a lock-in period of 15 years, with an option to make a partial withdrawal after the completion of 5 years.
ELSS, however, carries a lock-in period of only 3 years.
5. Time Horizon
One can invest for 15 years in a PPF account with an additional extension of 5 more years.
In ELSS investment, there is no time horizon – in fact one can continue with the investment as long as one wishes to.
The funds collected in PPF are used by the Government and one earns a fixed interest. Hence, there is no question of volatility.
ELSS funds are invested in equity and are subject to market risk and volatility.
7. Offered Through
PPF is offered through banks and the post office. To invest, one needs to open a PPF account, followed by a KYC process.
ELSS are offered by the mutual fund houses – one can invest directly through the AMC website, online MF investment portals or through Demat agents and registrars.
In both investment options, the contribution can be monthly or in a lump sum.
In PPF, the minimum investment amount is INR 500 and the maximum is INR. 1,50,000 for every financial year.
In ELSS, the monthly payments are known as Systematic Investment Plans (SIP) in which one can start investing with INR 500 and there is no upper limit of investment.
9. Partial Withdrawal Facility
One can partially withdraw money from the PPF account after the completion of 5 years of investment.
There is no such provision to withdraw money from ELSS until the lock-in period of three years is over.
Debalina Roy Chowdhury